Investment Highlights

• We maintain HOLD on Sime Darby Plantation (SDP) with a lower fair value of RM4.90/share (vs. RM5.50/share previously). Our fair value is based on an FY22F PE of 30x vs. 35x on FY21F’s EPS originally. We ascribe a three-star ESG rating to SDP.

• We have reduced our PE assumption to account for the earnings risk following the ban on SDP’s Malaysian palm products in the USA. There is risk that European customers may follow the US CBP’s (Customs and Border Protection) ban on SDP’s palm products from Malaysia due to allegations of labour abuse.

• During the analyst briefing yesterday, SDP did not provide a timeline as to when the US CBP would lift the ban on its palm products from Malaysia. This is because it would take time for SDP to implement corrective actions after the release of the assessment report of the group’s palm operations in Malaysia.

• The report, which is written by Impactt, is expected to be completed in June 2021. If there are many corrective actions to be carried out, it may take some time for SDP to implement them. For the US CBP to review and lift the ban, SDP has to provide updates and issue a final official report.

• Currently, Impactt is assessing SDP’s operations in Malaysia by verifying documentation and carrying out interviews with more than 1,200 workers in various locations. Impactt has also carried out site inspections at two of SDP’s operating units in the northern region. Impactt is envisaged to complete its assessment at the end of April 2021.

• Impactt was previously engaged by WRP Asia Pacific Sdn Bhd, a glove company which was banned by the US CBP in October 2019. The ban was lifted in March 2020. Impactt is a UK-based ethical trade consultancy, which specialises in improving labour conditions.

• SDP has a team that regularly engages with the group’s customers. Presently, the customers are giving time for SDP to implement the corrective actions after the assessment report is released in June 2021. SDP has lost one to two customers so far. The names of the customers were not disclosed. Most of SDP’s customers are multinational companies.

Source: AmInvest Research - 21 Apr 2021